Exhibit 99.1
Unaudited Pro Forma Financial Statements
In December 2017, Summit Healthcare REIT, Inc. (“Summit”, “we” or the “Company”) entered into an agreement to sell Friendswood TRS, LLC (“FWD TRS”), a wholly-owned consolidated subsidiary, to its current management company, HMG Park Manor of Friendswood, LLC, (“HMG”) pursuant to the Membership Interest Purchase, Assignment, Resignation and Release Agreement (“MIPA”), which transferred all of our rights, title, and membership interest in FWD TRS to HMG. The purchase price is based on FWD TRS member’s equity balance as of December 31, 2017, after all closing entries are recorded and per the MIPA, payable no later than 30 days after January 1, 2018. We estimate the purchase price to be between $0 and $100,000. As a result of the sale, as of January 1, 2018, FWD TRS will no longer be consolidated in our consolidated financial statements.
The following unaudited pro forma consolidated statements of operations of the Company for the year ended December 31, 2016 and for the nine month period ended September 30, 2017 are presented as if the sale had occurred as of January 1, 2016. Additionally, the unaudited pro forma consolidated statement of operations of the Company for the year ended December 31, 2015 removes the FWD TRS operations to reflect the presentation as discontinued operations. The following unaudited pro forma consolidated balance sheet as of September 30, 2017 assumes that the sale occurred on September 30, 2017. In future filings by the Company, the financial results for FWD TRS for the periods prior to January 1, 2018 will be presented as discontinued operations in our consolidated financial statements.
The unaudited pro forma consolidated financial statements are presented based on information currently available, are intended for informational purposes only, and do not purport to represent what the Summit financial position and results of operations actually would have been had the sale occurred on the dates indicated, or to project Summit's financial performance for any future period.
The unaudited pro forma consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes and “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in Summit's Form 10-K for the fiscal year ended December 31, 2016 and the unaudited consolidated financial statements and accompanying notes and “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in Summit's Form 10-Q for the period ended September 30, 2017.
The Historical column in the Unaudited Pro Forma Consolidated Statements of Operations and in the Unaudited Pro Forma Consolidated Balance Sheet reflect Summit's historical financial statements as of and for the periods presented and do not reflect any adjustments related to the sale.
The information in the FWD TRS operations column in the Unaudited Pro Forma Consolidated Statements of Operations for the nine-months ended September 30, 2017 and for the years ended December 31, 2016 and 2015 reflect the removal of the FWD TRS operations as those operations will be reflected as discontinued operations in future consolidated financial statements. The FWD TRS operations were historically reflected in the consolidated operations of the Company presented in the Form 10-K for the year ended December 31, 2016 and the Form 10-Q for the period ended September 30, 2017.
The information in the Pro forma adjustments column in the Unaudited Pro Forma Consolidated Statements of Operations reflects adjustments that are directly attributable to the transaction, factually supportable, and expected to have continuing impact as if the sale occurred on January 1, 2016. These pro forma adjustments reflect revenue under the amended triple-net lease between FWD TRS and CHP Friendswood SNF, LLC, a majority-owned consolidated subsidiary, and the interest income generated from the amended note receivable from HMG.
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of September 30, 2017
| | | Historical | | | Pro forma
adjustments | | | Pro forma | |
| | | | | | | | | | |
| ASSETS | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 4,235,000 | | | $ | (597,000 | )A | | $ | 3,638,000 | |
| Restricted cash | | | 3,575,000 | | | | - | | | | 3,575,000 | |
| Real estate properties, net | | | 70,111,000 | | | | (293,000 | )A | | | 69,818,000 | |
| Notes receivable | | | 4,777,000 | | | | 973,000 | A.1 | | | 5,750,000 | |
| Deferred costs and deposits | | | 500,000 | | | | - | | | | 500,000 | |
| Tenant and other receivables, net | | | 4,315,000 | | | | (788,000 | )A | | | 3,527,000 | |
| Deferred leasing commissions, net | | | 1,308,000 | | | | - | | | | 1,308,000 | |
| Other assets, net | | | 250,000 | | | | (77,000 | )A | | | 173,000 | |
| Equity-method investments | | | 8,369,000 | | | | - | | | | 8,369,000 | |
| Total assets | | $ | 97,440,000 | | | $ | (782,000 | ) | | $ | 96,658,000 | |
| | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | |
| Accounts payable and accrued liabilities | | | 3,438,000 | | | | (690,000 | )A | | | 2,748,000 | |
| Accrued salaries and benefits | | | 210,000 | | | | (130,000 | )A | | | 80,000 | |
| Security deposits | | | 1,208,000 | | | | - | | | | 1,208,000 | |
| Loans payable, net of debt discounts | | | 61,002,000 | | | | - | | | | 61,002,000 | |
| Total liabilities | | | 65,858,000 | | | | (820,000 | ) | | | 65,038,000 | |
| | | | | | | | | | | | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding September 30, 2017 | | | - | | | | - | | | | - | |
| Common stock, $0.001 par value; 290,000,000 shares authorized; 23,027,978 shares issued and outstanding at September 30, 2017 | | | 23,000 | | | | - | | | | 23,000 | |
| Additional paid-in capital | | | 117,326,000 | | | | - | | | | 117,326,000 | |
| Accumulated deficit | | | (86,468,000 | ) | | | 38,000 | B | | | (86,430,000 | ) |
| Total stockholders’ equity | | | 30,881,000 | | | | 38,000 | | | | 30,919,000 | |
| Noncontrolling interest | | | 701,000 | | | | - | | | | 701,000 | |
| Total equity | | | 31,582,000 | | | | 38,000 | | | | 31,620,000 | |
| Total liabilities and stockholders’ equity | | $ | 97,440,000 | | | $ | (782,000 | ) | | $ | 96,658,000 | |
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2017
| | | Historical | | | FWD TRS
operations | | | Pro forma
adjustments | | | Pro forma | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | | | | | |
| Rental revenues | | $ | 4,488,000 | | | $ | - | | | $ | 1,059,000 | D | | $ | 5,547,000 | |
| Resident services and fee income | | | 6,829,000 | | | | (6,829,000 | )C | | | - | | | | - | |
| Tenant reimbursements and other income | | | 596,000 | | | | (7,000 | )C | | | 154,000 | D | | | 743,000 | |
| Acquisition and asset management fees | | | 594,000 | | | | - | | | | - | | | | 594,000 | |
| Interest income from notes receivable | | | 132,000 | | | | - | | | | 17,000 | D | | | 149,000 | |
| | | | 12,639,000 | | | | (6,836,000 | ) | | | 1,230,000 | | | | 7,033,000 | |
| Expenses: | | | | | | | | | | | | | | | | |
| Property operating costs | | | 1,187,000 | | | | (442,000 | )C | | | 154,000 | D | | | 899,000 | |
| Resident services costs | | | 4,917,000 | | | | (4,917,000 | )C | | | - | | | | - | |
| General and administrative | | | 4,004,000 | | | | (54,000 | )C | | | - | | | | 3,950,000 | |
| Depreciation and amortization | | | 2,307,000 | | | | (41,000 | )C | | | - | | | | 2,266,000 | |
| | | | 12,415,000 | | | | (5,454,000 | ) | | | 154,000 | | | | 7,115,000 | |
| Operating income (loss) | | | 224,000 | | | | (1,382,000 | ) | | | 1,076,000 | | | | (82,000 | ) |
| | | | | | | | | | | | | | | | | |
| Income from equity-method investee | | | 251,000 | | | | - | | | | - | | | | 251,000 | |
| Other income | | | 37,000 | | | | - | | | | - | | | | 37,000 | |
| Interest expense | | | (2,173,000 | ) | | | - | | | | - | | | | (2,173,000 | ) |
| (Loss) income from continuing operations | | | (1,661,000 | ) | | | (1,382,000 | ) | | | 1,076,000 | | | | (1,967,000 | ) |
| Noncontrolling interests’ share in net income | | | (40,000 | ) | | | - | | | | (50,000 | )D | | | (90,000 | ) |
| Net loss applicable to common stockholders | | $ | (1,701,000 | ) | | $ | (1,382,000 | ) | | $ | 1,026,000 | | | $ | (2,057,000 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted loss per common share from continuing operations applicable to common stockholders | | $ | (0.07 | ) | | | | | | | | | | $ | (0.09) | |
| Weighted average shares used to calculate basic and diluted net loss per common share | | | 23,027,978 | | | | | | | | | | | | 23,027,978 | |
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2016
| | | Historical | | | FWD TRS
operations | | | Pro forma
adjustments | | | Pro forma | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | | | | | |
| Rental revenues | | $ | 6,677,000 | | | $ | - | | | $ | 1,412,000 | D | | $ | 8,089,000 | |
| Resident services and fee income | | | 8,194,000 | | | | (8,194,000 | )C | | | - | | | | - | |
| Tenant reimbursements and other income | | | 866,000 | | | | (10,000 | )C | | | 230,000 | D | | | 1,086,000 | |
| Acquisition and asset management fees | | | 496,000 | | | | - | | | | - | | | | 496,000 | |
| Interest income from notes receivable | | | 163,000 | | | | - | | | | 22,000 | D | | | 185,000 | |
| | | | 16,396,000 | | | | (8,204,000 | ) | | | 1,664,000 | | | | 9,856,000 | |
| Expenses: | | | | | | | | | | | | | | | | |
| Property operating costs | | | 1,707,000 | | | | (684,000 | )C | | | 230,000 | D | | | 1,253,000 | |
| Resident services costs | | | 7,011,000 | | | | (7,011,000 | )C | | | - | | | | - | |
| General and administrative | | | 4,783,000 | | | | (72,000 | )C | | | - | | | | 4,711,000 | |
| Depreciation and amortization | | | 3,559,000 | | | | (50,000 | )C | | | - | | | | 3,509,000 | |
| | | | 17,060,000 | | | | (7,817,000 | ) | | | 230,000 | | | | 9,473,000 | |
| Operating income (loss) | | | (664,000 | ) | | | (387,000 | ) | | | 1,434,000 | | | | 383,000 | |
| | | | | | | | | | | | | | | | | |
| Income from equity-method investee | | | 216,000 | | | | - | | | | - | | | | 216,000 | |
| Other income | | | 110,000 | | | | - | | | | - | | | | 110,000 | |
| Interest expense | | | (3,044,000 | ) | | | - | | | | - | | | | (3,044,000 | ) |
| Gain on disposition of real estate properties | | | 2,888,000 | | | | - | | | | - | | | | 2,888,000 | |
| (Loss) income from continuing operations | | | (494,000 | ) | | | (387,000 | ) | | | 1,434,000 | | | | 553,000 | |
| Noncontrolling interests’ share in net income | | | (307,000 | ) | | | - | | | | (66,000 | )D | | | (373,000 | ) |
| Net (loss) income applicable to common stockholders | | $ | (801,000 | ) | | $ | (387,000 | ) | | $ | 1,368,000 | | | $ | 180,000 | |
| Basic and diluted (loss) income per common share from continuing operations applicable to common stockholders | | $ | (0.03 | ) | | | | | | | | | | $ | 0.01 | |
| Weighted average shares used to calculate basic and diluted net (loss) income per common share | | | 23,027,978 | | | | | | | | | | | | 23,027,978 | |
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2015
| | | Historical | | | FWD TRS
operations | | | Pro forma | |
| | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Rental revenues | | $ | 8,344,000 | | | $ | - | | | $ | 8,344,000 | |
| Resident services and fee income | | | 9,182,000 | | | | (9,182,000 | )C | | | - | |
| Tenant reimbursements and other income | | | 944,000 | | | | (7,000 | )C | | | 937,000 | |
| Acquisition and asset management fees | | | 598,000 | | | | - | | | | 598,000 | |
| Interest income from notes receivable | | | 177,000 | | | | - | | | | 177,000 | |
| | | | 19,245,000 | | | | (9,189,000 | ) | | | 10,056,000 | |
| Expenses: | | | | | | | | | | | | |
| Property operating costs | | | 1,933,000 | | | | (740,000 | )C | | | 1,193,000 | |
| Resident services costs | | | 7,538,000 | | | | (7,538,000 | )C | | | - | |
| General and administrative | | | 4,313,000 | | | | (169,000 | )C | | | 4,144,000 | |
| Depreciation and amortization | | | 4,085,000 | | | | (36,000 | )C | | | 4,049,000 | |
| | | | 17,869,000 | | | | (8,483,000 | ) | | | 9,386,000 | |
| Operating income (loss) | | | 1,376,000 | | | | (706,000 | ) | | | 670,000 | |
| | | | | | | | | | | | | |
| Income from equity-method investee | | | 88,000 | | | | - | | | | 88,000 | |
| Other income | | | 46,000 | | | | - | | | | 46,000 | |
| Interest expense | | | (3,744,000 | ) | | | - | | | | (3,744,000 | ) |
| Gain on disposal of real estate properties | | | 971,000 | | | | - | | | | 971,000 | |
| Loss from continuing operations | | | (1,263,000 | ) | | | (706,000 | ) | | | (1,969,000 | ) |
| Noncontrolling interests’ share in net income | | | (131,000 | ) | | | - | | | | (131,000 | ) |
| Net loss applicable to common stockholders | | $ | (1,394,000 | ) | | $ | (706,000 | ) | | $ | (2,100,000 | ) |
| | | | | | | | | | | | | |
| Basic and diluted loss per common share from continuing operations applicable to common stockholders | | $ | (0.06 | ) | | | | | | $ | (0.09) | |
| Weighted average shares used to calculate basic and diluted net loss per common share | | | 23,027,978 | | | | | | | | 23,027,978 | |
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A:
The following assets and liabilities related to FWD TRS were included in the consolidated balance sheet as of September 30, 2017 and are being removed in the unaudited pro forma balance sheet as a result of the sale of FWD TRS:
| ASSETS | | | | |
| Cash and cash equivalents | | $ | 597,000 | |
| Fixed assets, net | | | 293,000 | |
| Accounts receivable from resident services, net | | | 788,000 | |
| Other assets | | | 77,000 | |
| Total assets | | $ | 1,755,000 | |
| | | | | |
| LIABILITIES | | | | |
| Accounts payable and accrued liabilities | | $ | 690,000 | |
| Accrued salaries and benefits | | | 130,000 | |
| Total liabilities | | $ | 820,000 | |
Note A.1:
As of December 31, 2017, there was an intercompany note for approximately $1,068,000 due to Summit Healthcare Operating Partnership, L.P. from FWD TRS that was eliminated in consolidation. The note was amended and restated as of January 1, 2018. The note does not bear interest and is due in 48 equal payments of approximately $22,000. Therefore, the amount included in the pro forma of $973,000 is based on the existing note value of approximately $1,068,000 and an imputed interest rate of 4.25%, and reflects a discount of approximately $95,000.
Note B:
Pro forma FWD TRS member's equity at closing as of September 30, 2017 was $38,000.
Note C:
The FWD TRS operations for the nine months ended September 30, 2017 and the years ended December 31, 2016 and 2015 have been removed from the historical balances for pro forma purposes, including the management fees paid to HMG and will be reflected in discontinued operations in future consolidated financial statements.
Note D:
On January 1, 2018, FWD TRS entered into an Amended and Restated 10-year triple-net lease with CHP Friendswood SNF, LLC (“FWD Lease”). The pro forma adjustments for the nine months ended September 30, 2017 and for the year ended December 31, 2016 relate to rental revenue as well as property insurance and related tenant reimbursements from FWD TRS under the FWD Lease. Interest income on the note receivable from FWD TRS discussed in Note A.1 above is also reflected as a pro forma adjustment. The unaudited pro forma condensed consolidated statements of operations for the nine months ended September 30, 2017 and the year ended December 31, 2016 also reflect the allocation of these pro forma adjustments to noncontrolling interests.
